Just as global markets were starting to show real fear that the U.S. would hit the debt ceiling deadline and default, Congress moved closer to a deal and stock prices have started to rise. As the Financial Times reports, the S&P 500 rose 1.3 percent, while Europe's Stoxx 600 index climbed 1.7 percent higher. Stocks are rebounding from "near one-month lows" associated with continuing government shutdown and impending default.
Although Wall Street initially looked like it wasn't taking the default threat too seriously, this week delivered more signs markets were worried that Congress really would blow up the economy. As of Wednesday, average daily trading of credit default swaps (CDS) increased significantly. As Tracy Alloway and Vivianne Rodrigues at the Financial Times explain [emphasis ours]:
The spike in trading activity is unusual for US sovereign CDS, which is traditionally a very thinly traded market. Traders often say that buying protection on the possibility of the US government restructuring or defaulting on its debt, is akin to buying insurance for the end of the world.
“It’s pretty incredible to see this market suddenly going from zero to 100 in just one week,” said one CDS trader.
Yesterday, Fidelity Investments sold off all of its U.S. debt holdings coming due in late October and November. Treasury Secretary Jack Lew warned Thursday morning that markets were starting to move based on default fears: "Trying to time a debt-limit increase to the last minute could be very dangerous. If Congress does not act and the U.S. suddenly cannot pay its bills, the repercussions would be serious." Lew told the Senate Finance Committee that "rising yields on short-term Treasuries and measures of stock-market volatility" had him concerned. Thursday marks one week before the debt ceiling deadline.
Hong Kong's stock exchange took deliberate, protective action against U.S. default Thursday morning when it "increased the margin demanded from investors that use short-dated U.S. Treasury bills as collateral for trading." The Hong Kong Money Authority confirmed that what Congress decides to do about the debt ceiling will have global repercussions: "We will watch the markets closely and consider appropriate measures as required."
Despite these signs of fear in the markets, news of House Speaker John Boehner's proposed short-term deal led the Dow Jones to have its best rally since June. But we aren't out of the woods yet. Even though Congress might reach a short-term debt ceiling agreement this week, there's no sign that the shutdown will end anytime soon. That's not good for business or global faith in America's economy.